Laughing at Alan Greenspan

I’m no big fan of Alan Greenspan or his pronouncements, especially those where he tries to persuade us that he wasn’t wrong in the past, he was right. There’s a classic example in his latest interview with David Wessel:

In a speech in October 2006, nine months after leaving the Fed, he told an audience that, though housing prices were likely to be lower than the year before, "I think the worst of this may well be over." Housing prices, by his preferred gauge, have fallen nearly 19% since then. He says he was referring not to prices but to the downward drag on economic growth from weakening housing construction.

No, I don’t think so.

Nowadays, Greenspan seems to have learned a little from his mistakes: he makes forecasts which can’t possibly go wrong.

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said in an interview. Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."

Um, if house prices continue to fall, Mr Greenspan, then we’re not at a bottom. You can have one or the other, but not both.

But the bit of the interview where Paul Kedrosky laughed out loud actually made perfect sense to me.

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

What’s wrong with this? Paul’s heavy on the sarcasm but light on any substantive criticism:

Awesome. Why wait around for sovereign wealth funds to bail the U.S. out when you can simply invite foreigners in and suggest they buy real estate? Alan’s soo-oooo clever.

Greenspan’s point is that letting in more skilled foreigners will increase demand for real estate, whether you "suggest" anything to them or not. They’ll need somewhere to live, after all, and they’ll be perfectly capable of paying their housing costs, whether they rent or buy. Admittedly, this will be more effective for housing prices in LA or Miami than it will for housing prices in Detroit. But it does seem to be a reasonably elegant partial solution to the housing crisis.

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